Take a break

There is perhaps more certainty regarding Britain’s future now that the general election result is known – certainty that many businesses will welcome. Whether or not Brexit is a good or bad thing, the uncertainty has definitely been unwelcome. The property industry has seen many signs of nervousness during the lengthy Brexit debate. There’s been a drop in transactions and indecision in the commercial lease sector: tenants choosing not to serve section 26 notices at the end of fixed terms of leases and allowing the status quo to remain, fearing commitment to long term premises. From the landlord’s perspective, locking a tenant into a long-term deal is the aim in order to avoid empty commercial units.

Brexit isn’t the only challenge for tenants. There are poor high street conditions with online competition and an increase in rent, wages and business rates. Studies suggest an increase in empty stores on the high street while footfall is decreasing. It’s no surprise tenants are considering their options to retain flexibility and prevent being handcuffed to lengthy leases. Numerous famous names weren’t able to weather the storm (think Mothercare, Karen Millen, Coast and Toys ‘R’ Us). The large retailers are now attempting to flex their muscles and force landlords to accept lower rents, even where existing leases don’t allow for such reductions. The justification is obvious: if the rent isn’t reduced, the tenant may go into liquidation potentially leaving the landlord with a vacant unit – or worse, vacant with unpaid rent and service charges. Persuading a landlord to agree to something the lease doesn’t allow for isn’t a tactic available to every tenant, so tenants need to consider their options.

BREXIT BREAK CLAUSE

Last year saw the case of Canary Wharf Group v European Medicines Agency [2019] EWHC 335 (Ch). As a result of the European Medicines Agency’s (EMA) relocation to Amsterdam and with 20 years left on its Canary Wharf home, the EMA argued that Brexit was sufficient to allow termination of the lease by frustration. It was unsuccessful. The court found that fulfilling the contract despite Brexit wasn’t an impossibility. The EMA didn’t have special status because it’s an EU institution and was no different from others seeking to relocate. Furthermore, the lease could have been assigned or sublet with the landlord’s consent. Had the court’s decision gone the other way, it may have opened the floodgate of Brexit break clause cases.

BREAK CLAUSES IN NEW LEASE

A five- to 10-year lease is the norm for commercial leases, particularly those protected by the Landlord and Tenant Act 1954 (the 1954 Act). In good times, this is essential to give certainty and the chance for a business to plan for the future. In bad times, it can be a burden – restricting flexibility and keeping a tenant in unaffordable premises. One way for a tenant to avoid a lengthy lease is to ensure, when taking a new lease or renewing one, that it has a tenant break clause. Should a landlord agree to one, it can give a tenant the opportunity to terminate the lease earlier than the end of the fixed term. In these times, negotiating a break clause at the outset is vital. Any break clause must be exercised correctly. It’s essential the notice is served at the correct time in a permitted manner with the right amount of notice. Most clauses will include pre-conditions such as payment of rent/ service charges and giving up vacant possession. These shouldn’t be overlooked as failing to comply with pre-conditions will invalidate an otherwise valid break notice. Consider the extent of a rent payment precondition: does it require payment up to and including the break date, or require rent that would otherwise be due? It could necessitate the tenant to pay rent for periods well beyond the break date.